“I was a Vancouverite until 1986 — when I realized I could never make a decent career for myself there as an Engineer, so I de-camped to Toronto for many years. And this was before the real estate boom. It’s only gotten worse in terms of career possibilities and affordability since the eighties.
A very dear friend I left behind in Vancouver bought a house five years ago in Ladner. It was a huge stretch for him and his wife to pay $539k for a side split on a 50 foot lot. But they were kicked out of their rental home and needed a place to raise a family and keep their stuff (bikes, skis, etc.). For some reason my friend thought that he couldn’t possible rent (no room) and besides, he argued, the mortgage payments would be the same as rent. (Insurance, taxes, maintenance etc were overlooked in the zeal to justify.)
Fortunately, the CMHC made it easy: a 40 year amortization and no money down and voila: a home. The $2,900 mortgage payment would be eased by a renter in the illegal basement suite. A combined income of $120k would make things tight, but what can you do? (Move away, or rent, I said.)
Fast forward five years. Despite an old vehicle in the driveway that cannot be driven because raising a few hundred dollars for repairs was impossible right now, the place looked great, with new hardwood floors and kitchen cabinets (RRSP withdrawal). But, the mortgage is up for renewal and guess what, new terms are required. Like a minimum equity requirement (80%), and a new amortization (25 years). This requires another loan for $100k (Mom) plus a big bump in monthly payments. What’s a man to do? Just talk to your financial advisor and come away with a new line of credit from your insurance company. Now he can pay interest only! (At a floating rate.)
The next leg down in real estate prices will bring about a fresh loss of the borrowed $100k and maybe more. The inevitable rise in interest rates will push the monthly payment beyond reach. Bankruptcy or family bailout has to be the final outcome.
And really, this sad state of affairs is due to a nesting desire and a bad case of rationalization. Curses, Vancouver, for ruining my best friend’s hopes for retirement and wrecking his balance sheet. I have to ask, is it really worth all this to live in Rain City?”
- ‘armourb’, via e-mail to VREAA, 18 Aug 2011
Pre-emptive comment: “Yes, they are, indeed, speculating. They are betting very heavily that RE prices will remain robust. They will be completely destroyed by any significant price drops. If they fully understood the reasonable risk of just 15%, 20%, 25% price pullbacks, they would consider selling. They are ‘speculative holders’.”
- vreaa
Good anecdote: these are realistic numbers for many people. Also shows the glacial pace of their decline (aka “kicking the can down the road”).
But unless something drastic happens – one of them loses their job, they need to sell, etc. they can probably keep it going for years regardless of house valuation, at least until they next refinance.
“the mortgage is up for renewal and guess what, new terms are required”
wrong. Mortgage renewal does require new terms but no problems qualifying. This is a standard, “sign here, and here and here and you’re done” procedure.
And what’s lost here is that this detached Ladner home is worth 50% more today over 5 years ago.
With risk comes reward. Real estate is not for the ultra conservative
Prices in Ladner are not up 50% in 5 years.
i thought real estate was the fool proof ‘investment vehicle’
which is it, then? safe enough to be considered conservative
or is it about wheelin’ and dealin’ for the agile, quick witted, daring trader?
get your bullshit together
News flash…rates are going nowhere for the foreseeable future (other than possibly lower), so Mr “Dear Friend” will be able to live the dream (?) for a lot longer than most realize (as mom’s retirement fund gets flushed down the drain). Our banks will indeed follow in the footsteps of our neighbors to the south and will continue to bend over backwards for model clients like this. Of course, this means savers will continue to be tortured for years to come.
That being said, this whole exercise is pointless as prices for most homes will continue to drift lower and lower for many more years. Whatever equity (and then some) that they may have had will get wiped out. Soon these folks will come to grips with the idea that all the quick and easy money they were promised, isn’t going to be landing their laps and that they will attempt to rationalize the whole situation by insisting to mom (and everyone else in their circle of trust) that everything is still “all good” and that they would have had to fork out all this cash every month anyway even if they were renting. Deep down inside, I’m sure they’re thinking to themselves that it isn’t their money on the line anymore, it’s the bank’s (and ultimately the tax payer’s). So, life will go on, the lavish, over the top evenings of entertaining on the patio, in the “media” room or around their 100 sq ft granite covered islands surrounded by glittering stainless steel appliances will continue to go ahead as planned.
A couple making this kind of money (if this figure is indeed correct) has no excuse to be in such a financial jam. I know countless individuals in the very same predicament, who feel they are entitled to all the good things in life and have neither the desire, nor the ability to ever pay off all these bills. I have had individuals tell me part of their contingency plan includes walking away, declaring bankruptcy and stiffing everyone else on the bill if the SHTF. Other 40-somethings (who are just getting into the market now) have said to me that everything will get looked after once their parents move on. So, don’t worry, be happy.
Mr. Bullwhip, I can’t agree with your conclusions. Most Canadians are humble and responsible and would not accept the risks of a glamourous ‘lifestyle’ home that they couldn’t afford; nor would they see bankruptcy as an honourable exit strategy. I believe most people want a home and hearth to raise their kids and be part of a community — call me old-fashioned if you like, but these are core Canadian cultural attributes.
Vancouver is perverting this dream causing people to rationalize extremely risky borrowing behavior by assuming a constant upward trajectory in prices. This ‘moral hazard’ is at the heart of what is wrong with the city currently. The next leg down in prices will be the cure and the punishment.
right, S Delta detached prices are up 38% since July 2006 – not 50%. The point is still made
So, after factoring in 5 yrs worth of mortgage interest, taxes, insurance and likely a few grand +/- (at the very least) on pointless, cosmetic upgrades, these folks are maybe breaking even at best. If they were ever to sell and move, realtor/legal fees, prop transfer taxes, moving costs etc would put them in the hole.
Mommy isn’t going to be getting her money back any time soon (if at all).
Yes, the point is made. You are a mendacious troll. Thanks for confirming.
Wait a minute? These folks have CMHC mortgage insurance, so why would the banks require new terms at renewal like 20% equity and a shorter amortization? I remember that everyone was saying with CMHC insurance in place, renewal would be automatic without any additional terms? Something isn’t right here.
Also if they are making $120K/year now and have been working like 20 years (given the poster moved away for work in 86) then what the hell did these people spend their money on in the last 20 years? Shouldn’t they have at least save some $$ from all those years of working?
You could say that they should but they probably don’t.
People spend very easily and freely in our society; everything is geared to encourage them to do so (from the BOC down).
Also, many have been spending more rather than saving because of the wealth effect: knowledge that their RE is increasing in value lets them feel they can spend more. This is a kind of ‘invisible RE_ATM’ effect.
Also, as you know, savings rate in BC has been negative for years.
So it is the norm for people to spend everything that they earn, and a bit more!
Honestly, I don’t know any one of my friends or family who spends more than they earn. There must be some sort of natural market segmentation here that drives an aggregate savings number into negative, but certainly not amongst anyone I know.
hc -> That must reflect (well) on your social circle. Example of biased sampling.
The fact remains that the BC savings rate is negative.
hazu – I’m guessing most of your friends and family are Chinese?
The savings rate amongst Chinese is off the charts compared to Westerners. The average family in China saves about 8 times more of their disposable income than the average American family.
another typical re-post trying to bash this homeowner without knowing all facts.
Fred -> It’s called an ‘anecdote’.
Anecdotes, by their very nature, don’t contain “all the facts”.
Do you doubt the major points of the story?
Is it not probable that there are people in this situation in the LML?
It always struck me as odd that highly education people making over $50K/yr would not saving anything while they are single or before kids. I can see people spending freely when they have high income on things like trips, clothing, dineout, but to spend more than you earn, not saving for emergency, RSP, down payment when you have the capacity to do so just always struck me as odd.
This couple bought a house with 0% down even though they make $120K/year. They borrowed ~$560K which is about 4.5x time salary but that’s not an overtly high burden given the current low salary. It just seems to me that there is something wrong with their finances here. Even if they didn’t buy a house, I serously doubt their finances would be much better. However not having a $500K mortgage would put them in a much better position.
i caught your slip – you love dineout
There is a key phrase here that I would love to see clarified:
“But, the mortgage is up for renewal and guess what, new terms are required. Like a minimum equity requirement (80%), and a new amortization (25 years). This requires another loan for $100k (Mom) plus a big bump in monthly payments.”.
Was the homeowner, in fact, advised that in order to renew the mortgage that a contribution of $100,000 was required?
Most people believe what ‘Rusty’ has said… that mortgage renewals are automatic for anyone who already has a mortgage in place, regardless of extreme changes in the metrics of the mortgage (ie. the situation faced by the 0/40 crowd to the current 5/30 enviroment or the prospect of severe underwater renewals).
Can we get any confirmation that this homeowner was required to contribute $100,000 to get this mortgage renewed and that they were forced to accept a 25 year amortization instead of current max of 30 years?
We’ll put the question to ‘armourb’.
IIRC, the 30-year amortization requirement applies only to CMHC-insured mortgages. Any homeowner with “20% equity can negotiate whatever they want with their bank.
Once you’ve purchased your mortgage insurance, it’s good for the life of your mortgage, as long as you follow the amortization schedule. I don’t think CMHC can require you to accelerate your mortgage amortization schedule.
That said, your bank may have their own internal mortgage practices which force all insured homeowners to meet the 30-year amortization. Your bank’s not under any obligation to renew your mortgage. Your CMHC insurance is transferable to another institution, as long as you can find another institution willing to renew it under its original terms.
This is a true story with details gleaned over several months. Yes, the friend makes $120k with his wife annually. I’m surprised that anyone reading here thinks this is an income that would support substantial savings while raising a family.
Mr. Whisperer said it better than me: he is a 0/40 guy moving to to a 5/30 environment. His decision was to sign on to a line of credit which is limited to 75% of the home’s value. Using Rusty’s number, he should be able to borrow $557k [1.38(539).75)] and pay off his old mortgage. But I suspect the new lender doesn’t think his house next to a cow patch south of the tunnel is worth $750k today. Ergo the $100k.
So the new arrangement allows him to pay interest-only at a low current rate, dropping his payment to ~$1,600 monthly. My knowledge of the mechanics of the original mortgage renewal is limited, but I’m told the new payment regime would have been impossible due to a required equity injection and higher payments. My apologies to the analytical among you – I was trying to paint a picture and got bogged down in details.
But, the point is this: a solidly middle-class Vancouver family is brought to the brink of financial ruin by the dream of a house of one’s own. This is a blight on the city and it must end badly at some point in time. I remain a refugee until then.
village whisperer,
If what I’ve heard on this site is true – that most homeowners are drowning in HELOC debt, then why aren’t they on the street having indebted themselves out of qualifying for their renewal? Or is it that banks just auto-renew a mortgage when term is up? Which is it? Do banks require qualifying on renewal or are homeowners drowning in HELOC debt? You can’t have your cake and eat it too on this one fella.
“If what I’ve heard on this site is true – that most homeowners are drowning in HELOC debt..”
…
Where on this site have you heard that ?
links, please.
‘Some’, maybe, but beyond that we can’t quantify, and have never claimed that ‘most’ are.
Remember, ‘most’ US/Irish/Spanish/etc homeowners were not distressed before their respective RE bubbles burst.
It only takes a relatively small number of owners to decide to/have to liquidate for a market to have the rug pulled out from under it.
ahhh good old smug rusty